Imagine this scenario: after years of research, development and testing, Company A wins FDA approval for a new – and patented – drug product, and takes the drug to market. Company B seeks FDA approval to market a generic version of Company A’s drug, and, as it is required to do, Company B certifies to the FDA it believes its generic product does not infringe Company A’s patents, or alternatively, that the claims of those patents are invalid. And as it is required to do based on Company B’s filings at the FDA, Company A files suit for patent infringement. But instead of engaging in the costly – and risky – battle over the patent infringement and validity issues, Companies A and B settle the lawsuit, with Company B agreeing to keep its generic drug off the market until Company A’s patents expire in exchange for payment of millions of dollars from Company A.

Settlement of patent infringement lawsuits is a common practice, especially in light of the expense and risks to each party associated with such suits. Most often, those settlements involve a license agreement or other payment by the accused infringer to the patentee. But is the sort of “pay-for-delay” or “reverse payment” settlement described in the scenario above legal?

For more than a decade, reverse payment settlements have become increasingly commonplace in the very high-stakes, multibillion dollar pharmaceutical industry, spurring antitrust challenges by the Federal Trade Commission (FTC) and private parties. In response to those claims, the federal circuit courts of appeals have split in their views as to how to balance the limited monopoly rights of patentees against the potential anticompetitive effects of agreements by which a patent owner pays potential competitors to stay out of the market. Most recently, the Eleventh Circuit Court of Appeals, following the lead of the Second and Federal Circuits, held that reverse payment settlements are presumptively lawful, provided the scope of the settlement does not exceed the patentee’s right to exclude competition under its patent claims. The Third Circuit, meanwhile, had previously held that these settlements are presumptively anticompetitive, and shifted the burden to the defendants to demonstrate that their agreements provide procompetitive benefits.

On June 17, 2013, in the case of FTC v. Actavis, Inc., the Supreme Court addressed this question of reverse payment settlements, walking the line between the circuit courts’ extremes to hold – by a relatively narrow five-to-three majority (Justice Alito recused himself) – that patent settlements (of any kind) are not automatically immune from challenges under the antitrust laws. According to the majority opinion, despite patent owners’ lawful monopoly rights, settlement agreements may operate to impose unlawful restraints on competition. However, the majority rejected the position of the Third Circuit, as urged by the FTC, that reverse payment settlements are inherently anticompetitive and violate the antitrust laws absent a showing by the settling parties that there are sufficient procompetitive benefits.

In his dissent adopted by the minority of the court, Chief Justice Roberts argued these settlements should be immune from antitrust scrutiny, and that the majority’s holding weakens the protection afforded inventors under the patent laws and discounts the reality that, even in “slam dunk” patent cases, a patentee might be willing pay large sums to mitigate even a minimal risk that its patents might be declared invalid. He further expressed concern that the threat of antitrust lawsuits may ultimately discourage competition by generic manufacturers of pharmaceutical products and will likely have a chilling effect on settlements in patent litigation, particularly in light of the risk of treble damage awards and the onerous and expensive discovery that goes hand-in-hand with any antitrust claim.

While both sides of the debate have claimed some measure of victory in the Supreme Court’s ruling, it seems likely this will not be the final word. The court provided little guidance as to how the Rule of Reason should be applied in cases involving patent settlements, preferring to leave it to the district courts to decide how best to analyze the potential anticompetitive effects. In light of this, and considering Chief Justice Roberts’ prediction that the majority’s holding in FTC v. Actavis, Inc., even limited to the context of reverse payment settlements “will not long hold,” we can expect this same question will find its way to the Supreme Court again in the future.

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